How to Prepare
With the UK’s upcoming exit from the European Union finally confirmed following the Christmas general election, John Leyden FCA, CEO and Founder of Carbon Accountancy, discusses how trade suppliers can prepare for the UK’s exit from the single market.
The last decade has been incredibly difficult for the UK’s high street retailers – and the fragility of the retail sector seemed to only increase as it went on, culminating in a particularly difficult year. More generous analysts might describe it as ‘challenging’. I’d prefer to call it disastrous.
According to the Centre for Retail Research, 300 stores permanently shut up shop every single week with 2,700 jobs lost with them. In 2019 alone we lost no less than 37 high street staples – Jack Wills, Clintons, Mothercare and Toys R Us to name but a few household names consigned to the history books. And as the world rang in the new decade, the retail sector had little to celebrate. Just four days into the 2020s, Debenham’s announced its resolution to improve their profitability by revealing the 19 locations that will permanently close in the coming weeks. Long-troubled HMV followed suit by announcing the potential cease trading at 10 more of its stores following the earlier closure of its Oxford Street flagship in February. Not a great indicator for the decade ahead, perhaps.
The crisis on our high streets has been caused by a rare combination of factors. Primarily, the way we purchase goods has changed drastically in the last decade. Online shopping has evolved massively, providing better experiences for consumers and preferred business rates and overheads for retailers. Of course, it’s not just UK retailers feeling the pressure as they compete with the growing online industry. But we have additionally faced unique challenges which have seen our sector more than most.
The impact of Brexit cannot be understated. Having been locked in uncertainty for over three years, the resulting unfavourable exchange rates have pushed up prices for consumers and retailers alike, whilst the latter’s confidence has sunk to new lows. At the very least, the recent re-election of the Conservative government has removed at least one level of uncertainty; we now know that our exit from the European Union will be happening, like it or not. But this is where assurances seem to end. Will we leave with a trade-deal? And if we do, what exactly will that look like? For this, we’ll have to wait and see. But following our exit from the single market, the retail sector will experience further bumps in the road. It all relates to the cash impact of VAT imports – and it could be the final nail in the coffin for many more retailers if they don’t prepare themselves.
Here, I’ll explain what the changes could mean, their potential impact and how retailers and trade suppliers can make safeguard themselves (and their cash flows!).
VAT will be payable on goods imported from the EU – immediately.
In the single market, retailers do not have to pay tax or customs duties on imports from the EU. Following the end of the transition period on 31st December 2020, assuming a further extension isn’t granted, this will change. Not only will retailers now be faced with an additional cost for imported goods – but this payment is required at the point of entry. There will be no grace period.
Food is one of the few exceptions to the coming changes, so we shouldn’t expect major supermarkets to be significantly affected by these changes.
Customers will experience the brunt of the cost of import duties, as retail prices will increase to cover them. But the issue of large sums of VAT being payable before they effectively enter the country and reach retailers presents the real problem.
Whilst VAT can be reclaimed – it will have a major impact on cash flow.
Retailers like to – or rather need to – keep hold of their cash. They purchase goods from suppliers with a significant credit period, which can be up to 150 days for larger retailers. It allows them to begin selling the goods to the end consumer before making payment to their suppliers, maximising their cash flow – all-important in the current retail climate. If retailers are expected to pay significant sums of VAT on day one, before their goods even reach them, they can expect this to suffer considerable dents.
For example, a retailer purchasing £100 million worth of goods from EU-based trade suppliers each year will now need to pay £20 million in VAT. And whilst this money can be reclaimed from HMRC, in many cases it could take up to four months. So, retailers are faced with the reality that they could lose £6.6 million in ready cash within the first four months of Brexit.
This, of course, hasn’t gone unnoticed by UK retailers. They may already have a solution – and it may be at the expense of their suppliers.
Could EU-based trade suppliers be expected to take the VAT hit?
Rumours are abounding that large retailers are planning on passing the VAT payments onto the trade suppliers themselves to spare them the initial cash hit. This is not a surprising solution. The UK will remain an attractive place to do business for EU suppliers.
But is it realistic to expect EU-based trade suppliers to be able to cover this? With their retail customers now operating outside of the European Union, these suppliers would need to reclaim tax too within the UK. It would require them to have a UK presence – perhaps a branch for them to import their own goods to before selling on.
For larger companies, this is unlikely to be a problem – most will have a global infrastructure and a base in the UK. But it could spell trouble for smaller or medium-sized suppliers. For those especially, they may face a difficult decision.
Solutions for EU-based trade suppliers: distributor vs expansion
If the word on the street proves to be correct and UK retailers plan on passing the VAT cost onto their suppliers, those without a UK base will have two options.
Firstly, they could work with a distributor – a separate UK-based company who could facilitate the purchase and sale of their goods. It may be a good temporary solution to tide suppliers over whilst they formulate more robust plans. It is by no means a viable long-term solution. Not only will it add a layer of complexity to trade, but suppliers can also expect to lose a significant profit margin to the ‘middle-man’.
As the all-too-familiar chime goes, ‘Brexit means Brexit’. Once done, there is no going back. EU-based trade suppliers would be wise to bite the bullet, take an initial cash hit and build a UK presence. It is by far the simplest and most sustainable solution. Luckily, the UK will remain an easy place to do business.
We will wait and see whether a trade-deal can be reached – and whether it could soften the blow of Brexit for both retailers and suppliers. ‘No deal’, however, remains a very real prospect; one that our government doesn’t seem too shy of.
What is clear, however, is that either retailers or suppliers will bear the brunt of the pain once we leave the single market. Without current visibility on who it will be, it wouldn’t do either any harm to formulate a contingency plan.
About the Author
John Leyden FCA was shortlisted for the Finance Director of the Year Awards 2012 by the ICAEW. He spent 7 years at KPMG before starting Carbon Accountancy, which prides itself on outstanding client service and meeting client needs through trust and dedication. John specialises in business advice, audits, tax planning, corporate finance, due diligence and share option schemes.
The firm was shortlisted in Accountancy Age’s British Accountancy Awards 2012 as Independent Firm of The Year, Greater London and was named as one of the “runners and riders” – one to watch – in Accountancy Age Top 50 + 50 firms in the UK.